tax brackets

The progressive income tax divides your income into ranges, called brackets.

Income within a bracket is taxed at one rate. Income past a certain amount is taxed in a higher bracket at a higher rate. There may be multiple brackets. Consider the following example of tax brackets:

bracket

tax rate

$1 - $10,000

10%

$10,001 - $20,000

20%

$20,001+

30%

If you make $30,000, you are said to be in the highest tax bracket, paying 30% in taxes.

That doesn't mean you're paying 30% of your income (or $9,000) in taxes. Many people have that misunderstanding.

What it means is that the highest rate you're paying is 30%.

For your income from 10,001 to 20,000, you're paying 20%. For your income from 1 to 10,000, you're paying 10%. Let's do the actual math.

bracket

tax rate

tax paid

$1 - $10,000

10%

$1,000

$10,001 - $20,000

20%

$2,000

$20,001 - $30,000

30%

$3,000

Add them up, and the total is $6,000. (Which works out to 20% in tax.)

Some people will say that "the first dollar you earn is taxed at the lowest rate" and "the last dollar you earn is taxed at the highest rate". This is factually true, but, tends to confuse beginners. So it's not much of a simplifcation.